Housing Bubble
Recently I've been wondering if I would see any media coverage of the so-called housing decline looked at from the perspective of the inflation of housing prices in recent years. I wondered if perhaps it would be considered too frightening for the American people to see just how big the bubble really was and just how little it has deflated so far.
But today I came across this article on MSN Money which posts a table of not simply recent declines in home prices but also the past five years' change in many of the nation's metropolitan areas. The right hand column shows very significant positive numbers whereas most of the numbers in the other columns are negative. The positive numbers show home price increases over the past five years.
If you think of the current decline as an adjustment to compensate for the bubble, this chart shows just what I had expected might appear, that there is a long way to go before the bubble has deflated. Mind you there's an effort under foot to keep the bubble inflated. We might just as easily find the market swing back into the positive range again before the gains of the past five years have been lost. But the trend right now isn't in that direction and there's no guarantee that prices won't continue to decline for awhile.
Owning a home isn't an inexpensive proposition. Most homes require steady investment for upkeep. Homes do wear out just like any other useful product. But in addition to routine home repair costs, there are mortgage interest expenses, property tax expenses, and insurance bills to maintain. Owning a home is good in the sense that even if home prices remain constant, when it comes time to sell, the owners can at least expect to recover their investment in the home's equity. With luck, if the market has been inflating, the homeowner can also recover some of the other expenses. But for home prices to inflate at a rate great enough to give a return on all homeowner expenses, it takes a bubble like the one we have been in for the past five years. Such a bubble is not the norm.
I have felt that this bubble was an inflationary force rather than business as usual. Home prices have been inflating at a rate much higher than the overall economy's inflation rate. We tend to see this inflation as a good thing, as a way to get ahead. Homes are investments meaning we expect to see returns on our entire investment. We expect to recover not merely the principle on our mortgage payments but also the interest and we expect to see a return on our property tax expenses and home repairs as well. But that isn't the way things should be. Owning a home should cost something. If it doesn't, there's something fishy going on. We're being set up for a fall by pressures beyond anything we should think of as normal.
In the case of home prices, there has been an abnormal amount of speculation going on. It is this speculation that inflated the bubble. Just after Bush became president in 2001 there was a decline in the stock market and a mild recession. Investors were nervous, but then low-cost loans made real estate appear to be an easy way for investors to make a quick buck. Real estate looked like - and actually was - a good investment. But for the market value to increase on property that in any real terms was not becoming worth more, something had to be happening behind the scenes. And it was. The dollar was in decline. All this low-cost loan money was driving the value of the dollar down. Instead of this real estate bubble being the good thing that it appeared to be, it was actually not healthy for our economy. It was driving the value of our money down.
Eventually that negative force caught up with us. This same downward force on the value of money was showing up as an increase in our cost of oil. Just as soon as the Fed began raising interest rates and stopped pumping hot air into the balloon, we began to realize that the balloon had a big leak in it. Housing prices began to fall. The bubble began deflating. Some investors took their money out and invested elsewhere. The stock market has been struggling for some time now with investors trying to pressure the market up again and they have been somewhat successful. Other investors found a new market, though, by investing in another bubble economy, oil futures. As we all know, this has driven the cost of fuel through the roof, again with the same negative impact on the value of the US dollar. Increased fuel expenses leave Americans with less income for their home expenses and are putting further downward pressure on home prices.
How big will the bubble get in energy futures investments? Nobody knows. If that bubble breaks, what will be the effect? Will it bring investors back into the real estate market? Nobody knows. But is there room for housing prices to continue this decline? Is the housing bubble still deflating? Yes it is. Does anybody have a solution yet? I don't think so!
But today I came across this article on MSN Money which posts a table of not simply recent declines in home prices but also the past five years' change in many of the nation's metropolitan areas. The right hand column shows very significant positive numbers whereas most of the numbers in the other columns are negative. The positive numbers show home price increases over the past five years.
If you think of the current decline as an adjustment to compensate for the bubble, this chart shows just what I had expected might appear, that there is a long way to go before the bubble has deflated. Mind you there's an effort under foot to keep the bubble inflated. We might just as easily find the market swing back into the positive range again before the gains of the past five years have been lost. But the trend right now isn't in that direction and there's no guarantee that prices won't continue to decline for awhile.
Owning a home isn't an inexpensive proposition. Most homes require steady investment for upkeep. Homes do wear out just like any other useful product. But in addition to routine home repair costs, there are mortgage interest expenses, property tax expenses, and insurance bills to maintain. Owning a home is good in the sense that even if home prices remain constant, when it comes time to sell, the owners can at least expect to recover their investment in the home's equity. With luck, if the market has been inflating, the homeowner can also recover some of the other expenses. But for home prices to inflate at a rate great enough to give a return on all homeowner expenses, it takes a bubble like the one we have been in for the past five years. Such a bubble is not the norm.
I have felt that this bubble was an inflationary force rather than business as usual. Home prices have been inflating at a rate much higher than the overall economy's inflation rate. We tend to see this inflation as a good thing, as a way to get ahead. Homes are investments meaning we expect to see returns on our entire investment. We expect to recover not merely the principle on our mortgage payments but also the interest and we expect to see a return on our property tax expenses and home repairs as well. But that isn't the way things should be. Owning a home should cost something. If it doesn't, there's something fishy going on. We're being set up for a fall by pressures beyond anything we should think of as normal.
In the case of home prices, there has been an abnormal amount of speculation going on. It is this speculation that inflated the bubble. Just after Bush became president in 2001 there was a decline in the stock market and a mild recession. Investors were nervous, but then low-cost loans made real estate appear to be an easy way for investors to make a quick buck. Real estate looked like - and actually was - a good investment. But for the market value to increase on property that in any real terms was not becoming worth more, something had to be happening behind the scenes. And it was. The dollar was in decline. All this low-cost loan money was driving the value of the dollar down. Instead of this real estate bubble being the good thing that it appeared to be, it was actually not healthy for our economy. It was driving the value of our money down.
Eventually that negative force caught up with us. This same downward force on the value of money was showing up as an increase in our cost of oil. Just as soon as the Fed began raising interest rates and stopped pumping hot air into the balloon, we began to realize that the balloon had a big leak in it. Housing prices began to fall. The bubble began deflating. Some investors took their money out and invested elsewhere. The stock market has been struggling for some time now with investors trying to pressure the market up again and they have been somewhat successful. Other investors found a new market, though, by investing in another bubble economy, oil futures. As we all know, this has driven the cost of fuel through the roof, again with the same negative impact on the value of the US dollar. Increased fuel expenses leave Americans with less income for their home expenses and are putting further downward pressure on home prices.
How big will the bubble get in energy futures investments? Nobody knows. If that bubble breaks, what will be the effect? Will it bring investors back into the real estate market? Nobody knows. But is there room for housing prices to continue this decline? Is the housing bubble still deflating? Yes it is. Does anybody have a solution yet? I don't think so!
posted by Bill | 9:25 AM
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